Articles & perspectives

Below is a chart showing the Fed’s Treasury holdings within its balance sheet. Almost 50% of the Treasury holdings matures between now and 2020, with 2018 the year with the most maturities. The way the fed handles their current assets will shape the financial markets now and for years to come. If they sell the Treasuries too quickly or prematurely, the bonds will crater along with an unexpected surge in rates. If they don’t sell the bonds, US debt will skyrocket at a faster pace. The Fed certainly has our attention. Simply put, they are screwed either way, its just a matter of when they want to be blamed for the problems they cause: now or later. Fed’s Balance Sheet: Notice as the bank assets rose, so did the stock market. Now that the Fed

We are similar in the spread cycle as 2004 – 2005. However, the current cycle has been manipulated due to Quantative Easing programs or central bank intervention that artificially distorted yield curve from 2008 – 2016, indicating this cycle may evolve differently from the past cycles.

Much has been made of President Trump’s expectation to implement his pro-growth agenda, which certainly contributed to the run-up in equities starting immediately after the election. However, recent market strength seems to result more from positive corporate earnings than anything else, which, on balance, is a more essential driver of equity returns. Furthermore, the Trump administration has yet to produce specifics about its tax goals while health care reform is taking much longer than anticipated. At the same time, ongoing investigations into the White House are, at a minimum, creating serious distractions. Investors still expect a tax bill, but the odds are diminishing of anything comprehensive being passed this year. Through the first quarter, U.S. companies grew at their fastest pace in nearly six years, extending the stock market rally that has stretched into its

The yield curve is showing rising short term rates, indidating a move to a risk-off sentiment where investors have reduced prospects for potential growth in equities. In addition, the High Yield Bond Spread is in consolidation, which is healthy, but it usually gets strained at these levels, especially since high yield bonds are trading at overly optimistic valuations. />

If you have ever visited an Emerging Market country, you may have two reactions: one of a struggling people with no hope and the other of a world of potential opportunities. Emerging Markets have had more than enough headwinds over the last few years, resulting from investor mentality to lean towards the “no hope” version of the EM world rather than the opportunities. The other primary debilitating factor was the increase of the US Dollar and rise of dollar-denominated loans to local currency bonds, which peaked from 2011 – 2014. Falling commodity prices and depreciating EM local currencies have also led to significantly underweight emerging market(EM) assets in international portfolios from retail to institutional investors. Yet, with commodity costs secure and EM currencies supported, EM should accordingly increase, and investors should reflect on whether or

US large caps ( 1.4%) and US small caps ( 1.1%) managed to bounce back from last week’s debacle of the Trump – Russian “collusion”. Europe (-0.3%) wasn’t so sanguine, as Trump’s visit to NATO was akin to a landlord showing up to collect overdue rent, even as the Manchester bombing threw uncertainty on its present defensive capacities. Latin America ( 1.3%) continued higher this week, followed by Asia Pacific ex-Japan ( 0.7%). Japanese large caps ( 0.2%) also eked out a gain. The US Dollar slowed its retreat ( 0.3%), helping to send commodity costs (-2.1%) and oil (-1.9%) lower. Q2 impetus has been away from US equities and into foreign equities, but US equities reached new highs this week — the Nasdaq and especially technology. The strength in Asia Pacific ex-Japan is related

Stocks have rallied since the election in a “reflation trade,” which can be broadly defined as an expectation of both higher inflation and stronger real economic growth. However, investors have recently started to doubt these themes with data on both fronts showing some weakness. First quarter GDP numbers this week could show growth below 1%, largely reflecting weaker consumer spending. In addition, following an oil-driven surge in CPI inflation to 2.8% year-over-year in February, March CPI inflation retreated to 2.4% year-over-year, well below expectations. Lower actual inflation numbers have also seeped into market expectations with the difference between 10-year nominal Treasury yields and 10-year TIPs falling from a post-election high of 2.07% to just 1.86%, as we show in this week’s chart. While a stalling-out in the oil price rally and cautious consumers are responsible

Housing: The National Association of Home Builders (NAHB) Housing Sentiment fell to 68 in April from 71 the prior month. Despite the drop, builder’s sentiment remains close to cyclical highs. Housing Starts for March declined 6.8% to 1215k after an upwardly revised 5.0% increase the prior month. Despite the monthly decline, Housing Starts were 9.2% higher than a year ago. The National Association of Home Builders (NAHB) Housing Sentiment fell to 68 in April from 71 the prior month. Despite the drop, builder’s sentiment remains close to cyclical highs. Housing Starts for March declined 6.8% to 1215k after an upwardly revised 5.0% increase the prior month. Despite the monthly decline, Housing Starts were 9.2% higher than a year ago. Housing Starts for March declined 6.8% to 1215k after an upwardly revised 5.0% increase the prior

House prices, as measured by the S&P CoreLogic Case Shiller 20-City Home Price Index, rose 0.90% (MoM) for January and is now up 5.70% (YOY). All 20 cities in the index showed YoY gains. MBA Mortgage Applications fell 0.80% last week following a decrease of 2.7%% the week prior. The 30-year Fixed-Rate Mortgage contract dropped 13 bps to 4.33%, while the 15-year FRM contract fell 11 bps to 3.57%. Pending Home Sales in the U.S. jumped to 5.5% MoM for February, the largest since July 2010. According to the Bureau of Economic Analysis, the U.S. Economy grew at 2.1% in Q4, revised up from 1.9%.

Trump’s new economy is benefiting from a reduction in the US Trade Balance, falling from -$48.2. billion to $43.6 billion. US Durable Goods also saw an improvement of 1.8% in February. MBA Mortgage Applications fell 1.6% last week. The 30-year Fixed Rate Mortgage gained 1bps to 4.34%. 15-year stayed the same Initial Jobless Claims pushed down to the lower end of their band, falling 25k to 234k as confidence in the economy stays strong. The US added 98k in new jobs in March. Unemployment fell to 4.5%, the lowest level since September 2007.